Abnormal Loss - Accounting Treatment

Particulars	Quantity (Units)	Value	Rate (per/Unit)
Gross Input − Abnormal Loss	1,000 100	1,00,000 10,000	100 100
Net Output	900	90,000	100

The rate column is always to be obtained as a quotient using the relation $\frac{Value}{Quantity}$ .
Net Output Units = Gross Input Units − Abnormal Loss Units
Abnormal loss in quantity terms should be deducted from the gross input to obtain Net Output.
Normal Cost = Total Cost − Cost of Abnormal Loss Units
Cost of abnormal loss units should be deducted from the total cost to obtain Net Cost of Output.

Gross input and total cost are debited to Process a/c. Deducting from gross input and from total cost amounts to deducting from the debit side of the Process a/c. Deducting from the debit side of process account is the same as crediting the Process a/c.

Therefore, Abnormal Loss both in terms of quantity and value is recorded by

Crediting Process a/c and
Debiting Abnormal Loss a/c

Units are also shown along with value in the relevant column.

Journal
Particulars		Amount (Dr)	Amount (Cr)
Abnormal Loss a/c To Process a/c	Dr	10,000	10,000
[For the value of abnormal loss.]		10,000	10,000

Recording is similar to that of recording normal loss. The difference is in the ledger account used and the valuation.

Ledgers

Process a/c
DrCr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
			By Abnormal Loss a/c	100	10,000

Abnormal Loss a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Process a/c	100	10,000

Recovery of Abnormal Loss - Insurance, Disposal/Sale

The value attributed to abnormal loss is the cost incurred on it till the point that it is adjudicated a loss. The value may be enhanced on account of the expenditure incurred on it. Where the abnormal loss has a physical presence, its value may be realised by selling or disposing it for a consideration.

Where Abnormal loss has a physical presence, its value may be recovered or realised by

Sale (if they are in a saleable condition)
Insurance realisation (if the stock has been insured)
Sale by repairing the damaged stock
Sale by converting the abnormal loss stock to some other form

Having a physical presence is not a guarantee that the abnormal loss units would be capable of being sold or disposed for a consideration.

Abnormal Loss ≡ Asset

Assume that through the journal entry for recording Abnormal Loss we are creating an asset by name Abnormal Loss whose value is the cost incurred on it. The actual value realised from this asset on its disposal may be more than, less than or equal to its value.

Thus, on disposal of abnormal loss units there may be a Gain or Loss or Neither Gain nor Loss

In problem solving, if no mention is made regarding the realisations from disposal of abnormal loss stock, we assume that it has not realised anything and the total value is a loss.

Expenses on Abnormal Loss Stock - Increase in Value

Expenses may be incurred on abnormal loss stock to carry on repairs or for further processing to make it saleable. Such expenses incurred should be treated as capital natured expenses and should go into the value of the asset, Abnormal Loss.

Asset Valuation Principle

All expenses incurred before brining an asset into usable condition go into the value of the asset

Thus, the additional expenditure incurred is debited to the Abnormal Loss a/c.

Journal
Particulars		Amount (Dr)	Amount (Cr)
Abnormal Loss a/c To Bank a/c	Dr	2,300	2,300
[For the expenses on abnormal loss stock]		2,300	2,300

Ledgers

Abnormal Loss a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Process a/c To Cash a/c	100	10,000 2,300

Sale of Salvaged Stock

Salvage

Save from ruin or destruction
Collect discarded or refused material
save

The salvaged abnormal loss stock may be sold as it is or by improving its value by incurring additional expenditure on it.

Generally, the price at which the abnormal loss stock is sold would be far less than the price at which the good stock can be sold. There may be exceptional cases where it may not be so.

Assume

Sale of 50 units at 40/unit

Total sale proceeds

=	units sold × selling price per unit
=	50 units × 40/unit
=	2,000

Journal
Particulars		Amount (Dr)	Amount (Cr)
Bank a/c To Abnormal Loss a/c	Dr	2,000	2,000
[For the sale of 50 units of abnormal loss stock]		2,000	2,000

In recording the transaction for sale,

under integrated accounting
- Cash a/c would be debited if the sale is for cash.
- Debtors a/c would be debited if the sale is on credit.
under cost ledger accounting
- General Ledger Adjustment a/c would be debited, whether the sale is made for cash or for a cheque or on credit.

Ledgers

Normal Loss a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
			By Cash a/c	50	2,000

Insurance Realisation

Insurance realisation is the amount that the insurance company would be paying (or accepting to pay) to make good the loss incurred on the abnormal loss stock.

Journal
Particulars		Amount (Dr)	Amount (Cr)
Insurance Company a/c To Abnormal Loss a/c	Dr	1,500	1,500
[For the insurance realisation receivable on the abnormal loss stock.]		1,500	1,500

In recording the insurance realisation,

under integrated accounting
- Bank a/c would be debited if the insurance amount has been received.
- Insurance Company a/c would be debited if the insurance amount has been approved and not yet received. Later on when the amount is received the debtor in the name of Insurance Company a/c is cleared.
under cost ledger accounting
- General Ledger Adjustment a/c would be debited in all cases.
- Where the insurance amount has been approved and not yet received, the entry is cost ledger accounting is recorded on the Insurance Company a/c being brought into the books as a debtor in financial accounting. No entry in cost ledger accounts would be recorded for the further receipt of insurance amount.

Abnormal Loss a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Process a/c	100	10,000	By Bank	–	1,500

Maximum that can be recovered through Insurance

The amount paid (accepted to be paid) by the insurance company would be dependent on a number of factors like the insurance agreement, the quantum of stock insured, the magnitude of loss, realisations from salvaged stock and compensations received from other insurance policies or companies etc.

The contract of insurance is a contract of indemnity (not a contract of guarantee). The insurance company would make good the loss to a maximum of the policy value. It will not just pay up the total policy value on the occurrence of the loss. We cannot assume the insurance company to be paying an amount greater than the actual net loss incurred.

Profit on Disposal/Sale of Abnormal Loss Stock

Abnormal Loss - 100 units of value 10,000 valued at 100/unit
Insurance received for 40 units at 2,500
Sale of the 40 units whose insurance claim is settled at 60/unit

Total sale proceeds

=	units sold × selling price per unit
=	40 units × 60/unit
=	2,400

Cost value of units disposed

=	units disposed × value per unit
=	40 units × 100/unit
=	4,000

Total realisation from units disposed

=	Sale realisation + Insurance realisation
=	2,400 + 2,500
=	4,900

Profit on disposal

=	Total realisation − Cost value
=	4,900 − 4,000
=	900

Balance

=	Abnormal Loss Units − Units disposed
=	100 − 40
=	60

Value of Balance

=	Balance units × value/unit
=	60 × 100
=	6,000

Journal
Particulars		Amount (Dr)	Amount (Cr)
Abnormal Loss a/c To Profit and Loss a/c	Dr	900	900
[For the surplus on disposal of the abnormal loss stock]		900	900

Abnormal Loss a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Process a/c To Profit and Loss a/c	100 –	10,000 900	By Cash By Bank By balance c/d	40 – 60	2,400 2,500 6,000
	100	10,900		100	10,900
To balance b/d	60	6,000

Profit & Loss a/c
Dr Cr
Particulars	Amount	Amount	Particulars	Amount	Amount
			By Abnormal Loss a/c		900

Note

Since only 40 units are disposed, the value of the other 60 units would be retained in the Abnormal Loss a/c, till they are disposed. At the end of the accounting period, these would be shown in the balance sheet as assets or by making any other appropriate adjustments to stock values.
The profit on disposal of abnormal loss stock is abnormal in nature and is credited to the Costing Profit and Loss a/c under cost ledger accounting or the profit and loss a/c under integrated accounting

Loss on Disposal/Sale of Abnormal Loss Stock

Abnormal Loss - 100 units of value 10,000 valued at 100/unit
Sale of the 100 units at 60/unit

Total sale proceeds

=	units sold × selling price per unit
=	100 units × 60/unit
=	6,000

Cost value of units disposed

=	units disposed × value per unit
=	100 units × 100/unit
=	10,000

Loss on disposal

=	Total (sale) realisation − Cost value
=	10,000 − 6,000
=	4,000

Journal
Particulars		Amount (Dr)	Amount (Cr)
Costing P & L a/c To Abnormal Loss a/c	Dr	4,000	4,000
[For the loss on disposal of the abnormal loss stock]		4,000	4,000

Abnormal Loss a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Process a/c	100	10,000	By General Ledger Adjustment a/c By Costing P/L a/c	100	6,000 4,000
	100	10,000		100	10,000

Costing Profit & Loss a/c
Dr Cr
Particulars	Amount	Amount	Particulars	Amount	Amount
To Abnormal Loss a/c	4,000

Note

Since all the 100 units are being disposed, the balance in the Abnormal loss a/c would represent either a profit or loss.
The loss on disposal of abnormal loss stock is abnormal in nature and is debited to Costing Profit and Loss a/c under cost ledger accounting or the profit and loss a/c under integrated accounting
The loss being transferred to Costing Profit and Loss a/c indicates the use of cost ledger accounting. As such General Ledger Adjustment a/c is debited in the transaction of sale of abnormal loss stock instead of either Cash a/c or Bank a/c or Buyer a/c in case of integrated accounting.

Disposal/Sale of Abnormal Loss Stock without Gain/Loss

Abnormal Loss - 100 units of value 10,000 valued at 100/unit
Insurance company accepted the claim of 8,000 for 80 units since no part of the stock is salvaged.
The claim on the rest of the units is still pending settlement.

Cost value of units on which claim is settled

=	units on which claim is settled × value per unit
=	80 units × 100/unit
=	8,000

Balance abnormal loss units

=	Total abnormal loss units − Units on which claim is settled
=	100 − 80
=	20

Since insurance realisation is equal to the cost value, there is neither profit nor loss on disposal of abnormal loss units.

Value of balance stock

=	Balance abnormal loss units × Cost/unit
=	20 × 100
=	2,000

Abnormal Loss a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Process a/c	100	10,000	By Insurance Company a/c By Balance c/d	80 20	8,000 2,000
	100	10,000		100	10,000
To balance b/d	20	2,000

Note

Since insurance claim on 80 units is only settled, the value of the other 20 units would be retained in the Abnormal Loss a/c, till they are disposed. At the end of the accounting period, these would be shown in the balance sheet as assets or by making any other appropriate adjustments to stock values.

Absorbing Value loss of Abnormal Loss units

In arriving at the cost of manufacturing a product or service, only normal costs are to be considered as being part of cost. Costs should not be influenced by abnormal natured losses and costs.

Value of losses should be eliminated from the total costs to ensure that costs include only normal costs.

All expenses/costs are debited to the process account. Eliminating a value/cost implies either deducting from the debit side or crediting the process account with the value.

Process a/c
Dr Cr
Particulars	Quantity (in Units)	Amount	Particulars	Quantity (in Units)	Amount
To Input	1,000	1,00,000	By Abnormal Loss a/c By Balance c/d	100 900	10,000 90,000
	1,000	1,00,000		1,000	1,00,000
To balance b/d	900	90,000

Assume the Process a/c is being balanced after crediting Abnormal Loss. The value left in the Process a/c is the cost of 900 good units which is the cost of input. This value is not influenced by any cost related to abnormal loss units.

10,000 being the cost of abnormal loss is eliminated from the process account so that no part of the cost related to abnormal loss units goes into the good units in the process account.

Author : The Edifier

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